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China fund manager eyes domestic players

Defensive strategy targets telecoms, utility


While high-level government negotiators and politicians in the United States obsess over China's currency and its fluctuations, Pauline Dan is on the ground looking for ways to profit from the drama and diplomacy.

Ms. Dan, portfolio manager for the $20-million MIX China Opportunities Class Fund, has recently started to favour China's telecommunications companies, financial institutions and retailers as she becomes a bit more defensive.

At the same time, she's lightening up on holdings in real estate, steel and heavy industry.

Ms. Dan, based in Hong Kong, manages the fund for MFC Global Investment Management, an arm of Manulife Financial Corp. She has been on a swing through Canada to answer questions from financial planners and brokers and explain the investing strategy of the fund, which has been up and running for about 20 months now.

What clients want to know, she says, is how sustainable China's rapacious economic growth is, and what measure of political risk and market volatility might stand in the way of future gains.

For her part, Ms. Dan expects the currency question to dominate discussions this year. She's also keeping an eye on inflation numbers and the level of interest rates.

China's foreign exchange reserves, which ballooned to $818.9-billion (U.S.) at the end of 2005, will likely hit $1-trillion this year. Ms. Dan expects intensifying efforts by the United States to pressure Beijing into allowing the currency to appreciate further.

A few weeks ago, China's exchange rate breached the psychological threshold of eight yuan to the U.S. dollar for the first time in a dozen years.

Ms. Dan is increasing her exposure to companies that are unaffected by changes in the yuan.

She says first-quarter growth in gross domestic product was a strong annual rate of 10.2 per cent. Since the central bank in China raised interest rates in late April in an attempt to discourage overcapacity and overinvestment in areas such as steel mills and real estate, Ms. Dan has been selling off shares in companies in those sectors.

She notes that the balance is delicate as the government tries to engineer a smooth appreciation of the yuan, while discouraging the kind of speculation and investing that come with a booming economy.

She would have liked to have seen the rate hike made a bit sooner, but says the Chinese government is trying to engineer a smoother appreciation of the currency at the same time that it's trying to discourage the kind of speculation and investing that come with a booming economy.

"If they have to aggressively increase interest rates, that is actually going to be additional fuel on a lot of hot money going into China to try to take advantage of the rising currency."

The portfolio manager has been increasing exposure to companies that earn the bulk of their profits in the domestic market. She points to utility company China Resources Power Holdings Company Ltd., for example.

She also likes the telecommunications players for their stable profits and good cash flow.

"It's steady income, it's not facing cutthroat competition and it's still in a secular growth trend," she says of the telecom industry.

China Mobile (Hong Kong) Ltd. -- the world's largest cellphone operator measured by users -- is currently the fund's largest holding, with a 9-per-pent weighting, while China Telecom Corp. Ltd. stands at about 4 per cent.

Meanwhile, she has less than 10 per cent of the fund's weighting in exporters. She is also light on natural resource companies.

Ms. Dan has reduced her stake in some of the property company holdings, such as China Overseas Land and China Resources Land.

She also sees attractive opportunities in the spending power of Chinese consumers -- especially with the Olympic Games scheduled to take place in Beijing in 2008.

Ms. Dan notes that hosting the Olympics helped give consumer products companies in Japan and South Korea a huge boost.

"[The Seoul Olympics] helped to springboard Samsung and LG [Electronics Inc.] into the global arena," she says. "Hopefully, the 2008 Beijing Olympics will have similar effects for some of the Chinese companies."

China play

Hong-Kong based Pauline Dan manages the MIX China Opportunities Class Fund for MFC Global Investment Management, an arm of Manulife Financial Corp.

MIX China Opportunities Class

Inception dateAugust, 2004
Total assets$20.02-million
Fund typeOpen-ended
Minimum investment$500
Management expense ratio2.88%

Top 10 holdings (as of April 28, 2006)

China Mobile Ltd.9.00%
China Life Insurance7.53%
China Construction Bank, Class4.05%
iShares MSCI Taiwan E.T.F.3.46%
(Fund Ownership)
China Netcom Group2.65%
China Telecom2.45%
Bank of East Asia Ltd.2.43%
Denway Motors Limited2.37%
China Resources Power Holdings2.18%

Returns (as of April 30, 2006)



© 2007 The Globe and Mail. All rights reserved.

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